Thanks For Nothing

The road to hell is paved with good intentions, or so the saying goes. When volunteers and members of the ABC reality television program "Extreme Home Makeover" helped out an Atlanta family, little did they know that it would all end in foreclosure. Will this be the only home featured on the show to end up being auctioned off?

Like any reality show out there, "EHM" and dreamy [that's what the ladies tell me] super-dude Ty Pennington trade on exploiting emotion and sorry, using gimmicky camera reaction shots and sob stories to draw in viewers. It's an old formula that works, and who wouldn't watch a show where neighbors rebuild the house of someone going through tough times?

In the case of an Atlanta family, the show rebuilt their home into a virtual castle, left them in excellent financial shape, and that should have been the end of the story, right?

In that particular episode of the hyper-benevolent reality show, which first aired in February 2005, it took 1,800 volunteers a week to demolish the house with the overflowing septic tank that belonged to Milton and Patricia Harper of Lake City, Ga., and then entirely rebuild a new, larger house, while the Harpers and their three children went away to Disneyland. When they returned, they had the biggest house on Ahyoka Drive, with all the appliances and furnishings, plus enough money to pay taxes on it for decades, plus a fund to send their children to college.

The house will be auctioned off, according to the Atlanta Journal-Constitution, next Tuesday on the steps of the Clayton County Courthouse.

The Harpers had used their home as collateral on a $450,000 loan from JPMorgan Chase and fell in arrears, the newspaper reported. He ran a home security business; she mommed at home. Happy to be on television back then, they declined to be interviewed last week...

The mayor of Lake City, Willie Oswalt, who said he'd helped lift a beam into place in the Harpers living room, told the press that "it's aggravating. It just makes you mad. You do that much work, and they just squander it."

People have the right to do stupid things. I hope all of that money bought something nice.

As the mortgage crisis gets worse and worse, I don't know if people like the Harpers should be bailed out. I hate to draw the line somewhere, but if you're going to bail out people who borrow nearly a half million dollars and piss it away, you might as well bail out everyone.

--WS

Too Little, Way Too Late

It's nice that the Federal Reserve has decided to step up and do something about predatory lending practices--but the time to do so was over three or four years ago. What is it about these people that angers me more--their incompetence or the fact that they seem to have the uncanny ability to wait until everyone who can make their fortunes at the expense of others have done so?

The Federal Reserve has adopted rules to give home buyers more protection from the types of shady lending practices that have contributed to the housing crisis and propelled foreclosures to record highs.

Chairman Ben Bernanke and his central bank colleagues approved a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers - people with tarnished credit histories or low incomes.

What? All of those warning signs over the past couple of years weren't enough? Anyone who thinks the mortgage meltdown just happened is kidding themselves. That's okay--all of the predatory lending people have moved on. They're probably running slum lord housing for renters who used to be homeowners...

--WS

The Specifics of Mortgage Fraud

This is how it's done:

Federal prosecutors said Thursday that owners of the Metropolitan Money Store targeted homeowners who risked losing their homes and then used straw buyers, fraudulently obtained loans and inflated real estate appraisals to strip equity from more than 100 homes in the Washington area.

The homeowners seeking help ended up losing whatever money they had invested and their homes.

[SNIP]

Maryland investigators began to hear complaints from homeowners about Metropolitan in 2006. According to the indictment, Metropolitan lured in strapped owners through ads on television, radio and in print. The owners were told they didn't qualify for a refinancing of their mortgage, and in return were offered a "Foreclosure Reversal Program."

Under the program, they signed away their title to third parties, but were supposed to get help from Metropolitan to obtain a better mortgage that would allow them to repurchase the home.

Instead, Metropolitan allegedly used the straw buyers, who were paid $10,000 each, to take out big loans on the homes using inflated appraisals. They then stripped any equity out of the homes - allegedly $10 million - and allowed the homes to fall into foreclosure.

What would have stopped them? Simple, basic regulation and oversight. At the first sign of an inflated appraisal, at the first sign of a foreclosed property, at the first instance of a complaint from a borrower, something should have clicked. The investigators got wind of the problem in 2006, but weren't able to indict until now--a delay which cost millions. If they had been able to move against this scheme more quickly, it seems likely that the scheme itself would never have progressed as far as it did. Instead of a handful of properties, a hundred were done. Had there been a thousand, what would be the difference?

So what did all of the money fleeced out of these people buy?

The 25-count indictment unsealed Thursday names Lanham-based Metropolitan Money Store and its president, Joy Jackson, 40, who allegedly used some of the money to pay for a lavish wedding for herself and Kurt Fordham, one of the other seven indicted. The wedding reportedly cost $800,000 and included a designer gown with a 40 foot train and a concert by Grammy-award winning singer Patti LaBelle

WBAL-TV 11 News reports that Jackson was a former exotic dancer turned mortgage broker and is alleged to have been the ringleader of the scheme prosecutors say defrauded homeowners and lenders.

The charges include conspiracy, mail fraud and money laundering. Prosecutors also seek the return of $35 million in fraudulent loans that the group allegedly took out from lenders. Each count of the conspiracy carries a maximum penalty of 30 years in prison.

Ah, the gilded age. Only in America can an ex-stripper steal millions, pay for a lavish wedding, and probably get away with it. They called it the "Metropolitan Money Store" and they lavished the proceeds all over themselves like cheap, tawdry people without morals usually do. Who was paying attention? After all, they were doing this publicly, out in plain sight, out in plain view. One would think someone, anyone would have asked a couple of questions. Like...I don't know. Patti LaBelle? At your wedding?

I say probably get away with it, but the reality is that this case will probably languish in the courts, some of the money will be returned, most of it will never be repaid, a few hundred people will probably lose their homes, and at the end of the day, another scheme to defraud people will work its way through a system that is simply not flexible enough to stop the crooks.

Remember when Reagan said "In this present crisis, government is not the solution to our problem; government is the problem"? It led to the kind of thinking that says that we can't have regulators and rules and bureaucrats watching over what goes on. It led to the kind of thinking that has brought us understaffed and overworked investigators and regulators all over the country. It has brought us to a point in our society when there's no one doing what is necessary to keep thieves from stealing millions by preying on desperate people who were already victims of a practice where people who weren't even indicted yesterday sold them homes they couldn't afford.

Reagan unleashed a predator society, an underclass of people who took the idea of anything goes and deregulation and, like virtually any good Republican usually does, he left us a hefty bill our grandchildren are going to have to pay off.

Everyone Can Stay At Alphonso's Place

Homeless? Alphonso Jackson will let you crash on his couch. Disgruntled regulator? Hey, it's all good. Have a free portrait of Jackson to put on your wall. Left holding the bill? Too bad, sucker. You should have left town when Alphonso left town. After all, this happened on his watch:

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.

Today, 3 million to 4 million families are expected to lose their homes to foreclosure because they cannot afford their high-interest subprime loans. Lower-income and minority home buyers -- those who were supposed to benefit from HUD's actions -- are falling into default at a rate at least three times that of other borrowers.

As these people lose their homes, the ripple effect through the economy will carry well into the next administration--and we need to remember that. Jackson is gone, but his "service" to this country will live on.

--WS

GAO Report Highlights Infrastructure Problems

According to the General Accounting Office (GAO), the US needs to reexamine how it funds, improves and rehabilitates its vital surface transportation infrastructure.

Through our prior analyses of existing programs, we identified a number of principles that could help guide a reexamination of the federal surface transportation program. While these principles are designed specifically to reexamine the surface transportation program, most, if not all of them, could be applicable to other federal infrastructure programs. These principles are:

• creating well-defined goals based on identified areas of national interest,
• establishing and clearly defining the federal role in achieving each goal,
• incorporating performance and accountability into funding decisions,
• employing the best tools and approaches to emphasize return on investment, and
• ensuring fiscal sustainability.

The reasons are very clear:

The economic well-being of the United States is dependent on the reliability, safety, and security of its physical infrastructure. The nation’s infrastructure is vast and affects the daily lives of virtually all Americans. In total, there are about 4 million miles of roads, 117,000 miles of rail, 600,000 bridges, 79,000 dams, 26,000 miles of commercially navigable waterways, 11,000 miles of transit lines, 500 train stations, 300 ports, 19,000 airports,5 55,000 community drinking water systems, and 30,000 wastewater treatment and collection facilities. Collectively, this infrastructure connects communities, facilitates trade, provides clean drinking water, and protects public health, among other things.

According to Popular Mechanics, there are ten critically important pieces of US infrastructure that need repair or rehabilitation immediately, including major interchanges, dams, airports, and canal locks.

For example:

In 2006, engineering experts calculated that in any given year there is a 1-in-6 chance that the Herbert Hoover Dike will fail, releasing waters from Lake Okeechobee. If that happened, South Florida's water supply could be contaminated, and 40,000 lakeside residents could be threatened by flooding. The Army Corps of Engineers has been working on improvements, but funding is limited–for the 2009 budget year, the government alloted about half of the requested money. In February 2008, a 1000-ft.-long stretch of dangerously eroded land was found near state-owned floodgates north of the lake.

The collapse of the I-35 bridge in Minneapolis, Minnesota highlighted the need to continue to invest and rehabilitate infrastructure. The cost of replacing bridges that collapse and kill or injure US citizens adds more of a burden are spread to the costs of lawsuits as well as the cost in productivity and wear and tear on other resources when commuters are shunted to other roads and vital arteries.

Kansas Governor Kathleen Sebelius and Service Employees International Union (SEIU) President Andy Stern, warn that turning the financing of infrastructure projects over to Wall Street could lead to another subprime mortgage meltdown:

Leaders of both the Republican and Democratic parties know the U.S. cannot raise money from traditional public sources of financing, including municipal bonds, user fees and taxes.

The financiers on Wall Street already have positioned themselves to take advantage of this national crisis for their own gain. Where most Americans see crumbling bridges and traffic congestion, the money managers see a treasure trove of fees, profits and more record bonuses for CEOs.

It's why some private equity firms and banks on Wall Street are raising massive dollars to buy these assets that have typically been owned and managed by the government.

In recent years, new infrastructure funds have been established in North America with capital commitments of $40 billion to $45 billion. These private funds have sprouted up like weeds, structured for short-term profits and sky-high fees -- usually up to a 2 percent management fee plus up to 20 percent of the profits.

It would be a monumental mistake to turn the future of America's infrastructure over to the same crowd that brought us the subprime crisis, an economy loaded down with debt and recession.

We should know better by now than to create a scenario where bridges and highways are sliced and diced like subprime loans into financially engineered "collateralized infrastructure obligations."

America needs a large source of stable, long-term capital to build the system of buildings, roads and power supplies needed to sustain the country. We need a source of capital that values infrastructure because it provides a reasonable rate of return, strengthens the overall economy and doesn't burden users with excessive fees.

Every decade or so, there is a renewed call for a return to the 1930s and the resurrection of the Civlian Conservation Corps as a means of reducing unemployment, investing in infrastructure, and energizing the American people in an effort to improve their country:

[Civilian Conservation Corps] CCC enrollees throughout the country were credited with renewing the nation's decimated forests by planting an estimated three billion trees from 1933 to 1942.

The 1932 Presidential election was more a cry for help from a desperate people near panic as it was an election in a "landslide" vote, the nation turned to Franklin Delano Roosevelt and the Democratic party searching for an end to the rampant unemployment and economic chaos that gripped the country. They weren't disappointed. Accepting the Presidential nomination on July 1, 1932, New York Governor Roosevelt planned a fight against soil erosion and declining timber resources, utilizing the unemployed of large urban areas.

Professional foresters and interested layman raised these aims. In what would later be called "The Hundred Days," President Roosevelt revitalized the faith of the nation with several measures, one of which was the Emergency Conservation Work (ECW) Act, more commonly known as the Civilian Conservation Corps. With this action, he brought together two wasted resources, the young men and the land, in an effort to save both.



The President wasted no time: He called the 73rd Congress into Emergency Session on March 9, 1933, to hear and authorize his program. He proposed to recruit thousands of unemployed young men, enroll them in a peacetime army, and send them into battle against destruction and erosion of our natural resources. Before it was over, over three million young men engaged in a massive salvage operation, the most popular experiment of the New Deal.

Could an infrastructure revitalization project, based in part on the CCC model, make up for the gaps in what Federal, state and local governments are willing to spend on infrastructure? A proposed pilot program could answer that question, if enacted and studied properly.

Yes, It Is the Economy, Stupid

While the campaign season unravels into ugliness--everyone seeming to bring up Martin Luther King Jr. whenever it suits them--there is widespread ignorance about what the subprime meltdown, the devaluation of the dollar, the cost of the war in Iraq, and the rise in energy prices means for this country.

[Here's my take on the whole MLK issue--shut up. There is no one worthy of claiming his mantle or holding themselves up to that level. No one. He paved the way for people to have a calmer and more reasonable discussion about race. He paid the price, not the Clintons, not the Obamas, and certainly not the Romneys. He died so that people could have a discussion, not a slap fight.]

Back to the economy. Yawn. Snooze. Whatever. Yes, I know. But wait, here's why this matters--from MSNBC today:

Wholesale prices rose by 6.3 percent in 2007
Year-over-year gain was largest in 26 years

WASHINGTON - Wholesale inflation last year shot up by the largest amount in 26 years while retailers suffered their worst December shopping season in five years as mounting economic woes caused consumers to put away their wallets.

The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.

Meanwhile, retail sales fell by 0.4 percent in December, the worst showing in six months, the Commerce Department reported. Consumer confidence has plunged, reflecting the worsening housing slump and a lingering credit crisis.

For inflation, the year ended on a more positive note, with wholesale prices falling by 0.1 percent in December. That reflected decreasing costs last month for gasoline and other energy products. It was a significant slowdown after prices had soared by 3.2 percent in November, which had been the biggest one-month increase in 34 years.

The combination of rising inflation pressures and a weak economy represent a dilemma for the Federal Reserve over whether to cut rates to boost economic growth even at the risk of making inflation worse.

Federal Reserve Chairman Ben Bernanke last week sent a strong signal that the Fed is more worried at the moment about weak growth than inflation — given a series of weaker-than-expected data in recent weeks.

The economy skidded to a virtual standstill in the final three months of last year, raising fears the country could fall into a recession, unable to withstand the multiple blows from the prolonged downturn in housing, a severe credit crisis and soaring energy costs.

What we have is a weakened and ineffective Fed chairman who simply can't keep cutting interest rates to stave off problems. Rates are already bottoming out and further cuts are going to do what? Take us to zero? What then? What will the shock of having to raise those rates do to the economy?

Then we have multiple issues that derive from failed leadership--poor energy policy, poor monetary policy, a constant need to let everyone else bail us out, and no end in sight for the billions being spent in Iraq. Do we have a Department of Labor that is looking out for the American worker? Don't make me laugh!

Everything is going to get more expensive, faster and with more impact on lower income Americans than has previously been felt. That's why they are going back to the early 1980s and the 1970s to find precedents for these rises and developments. Are you hearing stories about people having to leave their jobs because gas is too expensive? Are you hearing stories about people getting to the end of that rope and finally having no where to go? Because it's getting harder and harder to make money with a vehicle, or at a job more than 20 miles away from where you live and there's no letup in sight. We're at the beginning of this, not the end.

More and more people are going to start losing their homes. As more and more debt increases in this country, more and more people are going to fall further and further behind. We are spending ourselves into oblivion, and the day of reckoning gets closer and closer without any kind of coherent strategy in place to deal with it.

Here's where energy policy and where people live intersect--those long commutes that I alluded to? They're caused by people living far from where they work and were enabled by a system where you once could live twenty or thirty miles from where you worked and where gas was cheap and roads weren't crowded. We have to roll back the development of these massive, sprawling communities that are too far from places where people work. Is there money to build more roads? Of course not--that money was pissed away years ago. Is there any sense to living this way? Well, you've got to explain why there isn't and you've got to be straight with Americans about it.

Are they talking about it on the campaign trail? Are they talking about sacrifice and changing the formula for delivering entitlements to Americans? Because it is all tied together. Find a sane way to end the war, you stop the flow of money into that rat hole. Find a way to redirect that effort into getting us off foreign oil, you jumpstart the alternative energy industries that are in their embryonic stage in this country. Get us into a shared sacrifice and alternative energy frame of mind, you change the habits of Americans. Change their habits by getting them to save their money and quit buying shit at Wal-Mart. And you can't do anything until you deal with entitlements. If you think you can "cut foreign aid" and "cut defense spending" and balance the budgets of the future, I'm sorry. It's not enough. The biggest piece of the pie chart is the entitlement part, and the part where we pay interest on the debt gets bigger all the time.

I know, I know. Wishful thinking. Well, it's thinking I wish was being articulated out there.

[And this is where you go to find pictures of fighting bears. Grrr! Tell your friends.]

Some Business News to Make Your Head Swim

The chief business of the American people is business.

Yes, we all know that. I saw a snippet of the excellent program that Robert Wuhl has done for HBO, called Assume the Position, and he went over the whole thing about Calvin Coolidge (who said the above) and his three month stay in South Dakota. I have actually seen the hotel where he spent his time--they had a plaque that detailed his stay at what may or may not have actually been the same hotel. Sorry, Black Hills. I haven't been back since the early 1980s. Are you still an oasis of interesting in a sea of flat plains? All I remember was being able to backpack and drink out of the streams on your hiking trails out there. Yes, I can tell my kids--I once drank out of an actual stream.

Our economy should receive more attention. Best economy of our lifetime? Worst economy? Why don't people pay more attention?

Here's an excellent little piece by a man named Dan Dorfman:

After what Los Angeles money manager Arnold Silver called "a brutal three days," the question is: What now for the market?

A Wall Street superstar this year who runs Balestra Capital Partners, Jim Melcher, says he's "worried about a recession. Not a normal one, but a very bad one. The worst since the 1930s. I expect we'll see clear signs of it in six months with a dramatic slowdown in the gross domestic product."

[snip]

Mr. Melcher, a market bear, had some pretty discouraging words. "What I think is not good for the country, but good for me." he says. His basic advice to the country's roughly 80 million stock players: Run for the hills — the worst is far from over. An investor's stock portfolio now, he believes, should be only about half of what it might normally be.

With the housing market in a state of collapse — and he says he believes it is far from over — Mr. Melcher argues that average homeowners will not be able to withstand the kind of recession he sees, given the added burdens of rising energy and food costs, and continued deterioration in the credit markets.

Noting that consumption is already slowing, Mr. Melcher figures sharply rising unemployment is inevitable. Another of his worries is that central banks around the globe, America's included, are debasing their currencies, which is setting the stage for a new round of higher inflation. Our bear figures the next six to 12 months will be awful for investors as the market goes down "pretty substantially." His frightening outlook calls for an additional 20% to 30% decline from current levels. A drop of that magnitude would put the Dow down in a range of roughly 9,100 to 10,400.

Let's not kid ourselves--there's no question that Pollyanna could find a pony in a pile of horse manure and find something about our economy to praise. Does anyone get that sense of deja vu all over again for 1987? The other day I saw a story about the homeless, and how 1 out of every 4 is a Veteran. Next thing you know, some Evangelical Christian is going to get caught up in a massive scandal involving sex, fraud, money and wine. Oh, never mind.

Is anybody heeding the call? Are the fatcats quietly diversifying themselves while everything gets ready to collapse?

Today is a good day to look at the investments and the strategies my family has in place, and that's what I'm going to do. Not that there's been any neglect, but hey--who sits around thinking about these things on a regular basis? I encourage everyone to do whatever they need to do to make sure that if things go in the tank, they have a plan to rescue their resources and come out looking good. I've got a date with T. Rowe Price, and I'm not bringing flowers.